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Tax and NI treatment of additional income.
I have a client with self-employment income regularly in excess of £100,000. She has recently accepted a part-time office generating an annual income of about £15,000 (with only a negligible impact on her professional profits). I believe that this additional income falls within terms of ITTOIA 2005, s 16C, although there might be different views as to whether £15,000 is considered insubstantial.
Assuming that s 16C applies, how is it possible to get an NT code applied to the office income? What happens to any PAYE that is deducted in the meantime? I assume that travel expenses will then be subject to the ITTOIA rules rather than those under ITEPA. Is that correct?
In addition, what happens to National Insurance? Can the two sources be similarly merged so as to avoid primary contributions being paid? How do the contributions caps operate in such circumstances? Is it actually advantageous to pay just class 2 and 4 and no class 1 contributions? If the two sources are shown on the same page of the tax return, how does my client avoid paying surplus contributions?
Query 20,071 – Planner.
Tax consequences of planting trees in development contract.
My client is, unfortunately, struggling with farm profitability and is therefore selling off small areas of land and buildings for development projects where possible.
As part of the current development deal being negotiated with the local council, the promoter agreed that my client has to plant five acres of trees on existing farmland which is located away from the project.
The tax treatment of the cost of tree planting and maintenance is a potential tax dilemma. It is assumed that the physical cost of the tree planting of approximately £20,000 is correctly allowable as a CGT cost against the development gain. However, the tax question arises as to the future cost of tree maintenance over the next 30 years (spraying around the trees, controlling brambles, thinning, etc). The saplings were planted in the heatwave so there will be some replanting costs for lost trees in the spring. This cost falls into another tax year to the development contract.
My client has no other commercial woodland but if this planting were to be, for example, expanding a commercial woodland operation which enjoys potentially ‘tax free income and non-tax allowable costs’, then is the planting potentially not tax allowable? No grant monies were obtained for the replanting, but if the landowner were to pursue a grant, this would be offset against the planting costs and it is assumed that the cost of planting would again not be allowable as a CGT cost.
What are readers’ thoughts on the various tax consequences?
Query 20,072 –Eco Warrior.
Are withdrawals trust income or capital?
A discretionary trust holds offshore life assurance investment bonds. The settlor has always been UK tax resident and is still alive. All the trustees are UK tax resident and have always been. It is therefore a UK resident trust.
If withdrawals are taken within the cumulative 5% limits, are these withdrawals trust income or trust capital? With a ten-year anniversary approaching, the plan was to ensure that the cumulative 5% drawdowns had been taken and paid to beneficiaries in order to reduce the trust capital.
HMRC’s Trusts, Settlements and Estates Manual TSEM3220 seems to indicate it is income for tax purposes, but I understood that the concept of life bonds is that the 5% is a return of capital. If it is income for tax purposes does that mean that the payment of the 5% drawdowns to beneficiaries is an income distribution and not a capital distribution requiring an exit charge?
Query 20,073 – Puzzled.
VAT challenges with holiday homes.
I am confused about the VAT situation with a new holiday home that my client is buying. It was built from bare land by a builder but the planning permission prevents it from being used as a principal private residence. In other words, it will not qualify as a new dwelling for zero-rating purposes. Is this correct?
I understand that a potential VAT escape route would be for my client to purchase a 999-year lease in the new home rather than the freehold because the deal would then be exempt from VAT rather than standard rated.
The leasehold option might be complicated so, as a further option, my client has asked if he could buy the freehold – plus VAT – but then rent it out for two or three years on a commercial basis and register for VAT on a voluntary basis to claim input tax. Will this work? The purchase price is £230,000 excluding VAT. After three years, he and his wife will use it for their private purposes so will deregister from VAT.
What do readers think?
Query 20,074 – Vacation Val.
Queries and replies
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